If you look at all the articles published and all the discussions had about the market, you would see one underlying similarity: Each and everyone debates what will occur after the next piece of “news” is published.
Whether we are speaking of CPI, PPI, employment, or other such similar reports, or whether we are speaking of the next Fed pronouncement or speech, or whether we are speaking of the next impending political development, the sense of certainty being presented by most regarding the market’s reaction to an impending event is what most of us read about or hear from pundits, analysts, or our brother-in-law.
Yet, how many of you have actually gone back to review just how important those events or news announcements really were to the market? How many of you have done any research to see whether your views about what affects the market really were determinative of the next move made by Mr. Market? And, then we can ask how many of you are being honest in those perspectives, or are you simply engaged in histrionics while you attempt to manipulate the market reaction (or lack thereof) into a reasonable narrative which will then make sense to you, as you look towards the next market-moving event?
Albert Einstein is commonly attributed as the author of the definition of insanity: “Doing the same thing over and over expecting a different result.” And, based upon Einstein’s definition, I propose that most market participants are truly insane.
Nobel Prize winner Daniel Kahneman once noted that we have a puzzling limitation within our minds:
“Our excessive confidence in what we believe we know, and our apparent inability to acknowledge the full extent of our ignorance and uncertainty of the world we live in. We are prone to overestimate how much we understand about the world... overconfidence is fed by the illusory certainty of hindsight.”
So, based upon my opening of this missive, I believe that we are quite confident that the latest and greatest piece of news or data that we expect will move the market based on the substance of that news or event. And, in true form to Einstein’s definition, we maintain this expectation just before each and every proclamation of the news or the event.
Yet, it is rare that we ever go back to test how well this approach to market prognostication has aided us in our ability to maintain on the correct side of the market or if it placed us on the wrong side of the market move more often than we realize.
Let me give you one example of how histrionics plays games with our minds and decision-making in the market. A number of weeks ago, I presented a keynote address at the Las Vegas Moneyshow convention. After my address, I fielded questions from an audience of over 600. One questioner asked me how the cessation of combat in Ukraine would affect the markets.
Being trained in law school, I proceeded to answer his question by challenging him with my own question. So, I asked him if he knew what happened to the market on the day that Russia invaded Ukraine. He raised his hand in the air and pointed his thumb to the floor, suggesting that the market dropped on that news. When I explained to him that the market actually began a 10% rally on that very day, I could have offered him a crane to assist in pulling his jaw up off the floor.
You see, we assume that the market works in a logical manner. We assume that it goes up on good news and goes down on bad news. Yet, this is far from the truth, to which anyone who really follows the market honestly and closely can attest.
I know I present this quote from Robert Prechter’s seminal book The Socionomic Theory of Finance quite often, but the lesson inherent within it is of utmost importance:
“Observers’ job, as they see it, is simply to identify which external events caused whatever price changes occur. When news seems to coincide sensibly with market movement, they presume a causal relationship. When news doesn’t fit, they attempt to devise a cause-and-effect structure to make it fit. When they cannot even devise a plausible way to twist the news into justifying market action, they chalk up the market moves to “psychology,” which means that, despite a plethora of news and numerous inventive ways to interpret it, their imaginations aren’t prodigious enough to concoct a credible causal story.
Most of the time it is easy for observers to believe in news causality. Financial markets fluctuate constantly, and news comes out constantly, and sometimes the two elements coincide well enough to reinforce commentators’ mental bias towards mechanical cause and effect. When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist.”
Ralph Nelson Elliott once wrote:
“The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long-term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.”
And, despite Elliott’s penning this proclamation 80 years ago, recent studies have provided support to his proposition.
In a 1988 study conducted by Cutler, Poterba, and Summers entitled “What Moves Stock Prices,” they reviewed stock market price action after major economic or another type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.
However, the study concluded that “[m]acroeconomic news . . . explains only about one-fifth of the movements in stock market prices.” In fact, they even noted that “many of the largest market movements in recent years have occurred on days when there were no major news events.” They also concluded that “[t]here is surprisingly small effect [from] big news [of] political developments . . . and international events.” They also suggest that:
“The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases casts doubt on the view that stock price movements are fully explicable by news. . . “
In 2008, another study was conducted, in which they reviewed more than 90,000 news items relevant to hundreds of stocks over a two-year period. They concluded that large movements in the stocks were NOT linked to any news items:
“Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps.”
Now, I know what many of you are probably thinking – “come on Avi, I have seen it happen myself where the market moves right after something is announced.”
My answer to you is that I want you to be brutally honest with yourself right now. I will grant that you probably remember some very clear points in time where a positive news event aligns with a positive market move, or vice versa. But, I can also assure you that you choose not to remember those times when they were not in alignment. You have either rationalized why it happened opposite to your expectations, or you simply shrugged it off, never considering it again.
Let me give you two recent examples. How many of you remember how the October CPI report came in worse than expected, which the pundits claimed would cause the market to drop another 5% or more? Yet, what did the market actually do? It rallied 6% off that intra-day low that day alone. Now, how many of you remember that clearly?
Another example is when we rallied off that October low into a December high. Do you remember what supposedly caused a sizable pullback off that December high? It was a better-than-expected PPI report. How many of you remember that?
I know when I pointed this out to other questioners at the Money Show a few weeks ago, many simply gave me a quizzical look, almost not understanding how this could have been possible.
I want to note another finding presented by Kahneman:
“Evidence is that we are born prepared to make intentional attributions.” In other words, our minds engage in an automatic search for causality. Moreover, we also engage in a deliberate search for confirming evidence of those propositions once we hold them dear. This is known as the “positive test strategy.”
Moreover, unless we are able to identify the confirming evidence of positive news equating to positive market movements, or vice versa, we tend to erase contrary evidence from our memory bank.
So, while many of you are so quick to claim regarding market action aligning with news or data that “I have seen it happen myself so many times,” I am quite certain that you have erased from your memory bank the many times you have seen the exact opposite occur. And, the studies I presented above support my proposition that it occurs more times than you likely remember.
Again, as Robert Prechter correctly pointed out:
“When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist.”
The purpose of my writing these articles is not to confuse you. My purpose in writing these articles is to challenge you to become a more critical and intellectually honest thinker and investor rather than a superficial one.
At the end of the day, it is your hard-earned money and, therefore, your choice as to what you want to do with it. I propose you choose a path with your eyes open rather than simply picking one while wearing blinders.
Let’s now move on to our market perspective. But, I want to preface it by pointing out that nothing has changed in my perspective. When I called for a bottom in October of 2022, I had an expectation at that time that we would rally to at least the 4300SPX region off that low.
I am still seeking a move to 4300+ in the S&P 500. Until now, support was at 4050SPX. And that has been tested several times before we finally broke out over the 4195SPX region, which has held us in check for a number of months.
So, I am now moving support up to the 4100SPX region. As long as any pullback we see this coming week continues to remain over 4100SPX, then I am still looking for a move to 4300+ in the coming weeks.
Alternatively, it would take a break of 4100SPX with follow-through below 4050SPX to tell me that a top is now in place, and a larger degree pullback has likely begun. Again, for now, this is only an alternative perspective.
As I have said many times before, this is no different than if an army general were to draw up his primary battle plans and, at the same time, also draw up a contingency plan in the event that his initial battle plans do not work in his favor. It is simply the manner in which the general prepares for battle. We prepare for market battles in the same manner.
Again, while I will never be able to tell you with certainty how the market will move in the coming weeks, months, and years, I present you with enough information to know where my primary perspective is wrong so that you can adjust in order to take account for the alternative situation. And, until such time that the market proves our primary perspective is wrong, we will continue to follow our primary perspective, which has been guiding us extraordinarily well for many years.
By now, I hope you recognize the difference in our analysis approach, other than the accuracy thereof. We strive to view the market and utilize our mathematically based methodology in the most objective and intellectually honest fashion as possible, no matter how crazy it may sound. Moreover, it provides us with objective levels for targets and invalidation. So, when we are wrong in the minority of circumstances, we are able to adjust our course rather quickly rather than fighting the market like many others you may read. So, you will never hear from me that “the market got it wrong.”
In the bigger picture, I am expecting that we will likely return to the 3700-3900SPX region as we look toward the summer. The nature of the structure within which we return to that region will tell us if the market is going to set up a crash later this year, or if it will set up yet another rally that can take us next to the 4500/4600SPX region.
As of this point in time, I cannot provide any clear guidance as to which path the market will take in the last half of 2023. I simply will have wait until the market provides clarity based on the structure of the next decline towards 3700-3900SPX.
Unfortunately, there are times during which I will be unsure as to how the market will react, and I will honestly tell you how I see it. And until I see the structure of the next decline, I will not be able to provide an honest and informed opinion as to how the market will take shape during the last half of 2023. But, for now, I am expecting this rally to complete in the coming weeks and then return us to the 3700-3900SPX to give us clarity as to how the last half of 2023 will take shape.